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Wednesday, November 18, 2015

Oil Shares Lead a Market Supporting Solidarity

The biggest story of the weekend, which has already begun to pour into the following week, was the terrorist attacks in Paris along with the manhunts and retaliations that followed. Most people understand the political ramifications of the ISIS attacks but aren't often as privy to the consequences in the markets. This is exactly the premise of successful terrorism, that the target experiences detrimental changes in political, social, and economic structures which either hinders growth or disrupts the ability to strike back. In this case, ISIS sought to limit the political will to conduct an air campaign in Iraq and Syria. The results? Well, let's say they came out in favor of solidarity.

The S&P 500 of the United States actually grew 1.51% over the past two days with Monday's movement more intense than today's flat movement. Small cap stocks remained solid as well despite bearish movement last week and the attacks in Paris. Gains of 0.73% were sustained even though a correction today forced a tiny correction. Overall, U.S. markets looked generally healthy with investors appearing to support Paris "solidarity" and "unity" in the face of needless slaughter. Threats of possible terrorist activity in the U.S. were absent in market psychology with traders resuming trends and sentiment that were seen last week. But somehow, I feel that Monday gains after the minute of silence scheduled before the opening bell were a response of determination and hope that we will not let this horrible act move us. Economic sanity remained. European shows of strength were even stronger with the DJ Europe index increasing 1.82%.

Provided by FactSet

If this graph doesn't encapsulate the beauty of strength in the face of evil, then look closer. Yes, the DJ Europe index grew 1.82% through today's trading session which was impressive enough, but three of the most affected countries almost all doubled those gains over the same period. The Germany DAX sprung up 3.26% and the Belgium BEL 40 jumped 2.98% as dozens of counterterrorism raids made tangible the Islamic State network in those nations. Beating them still was the resilient markets of France exploding to 3.82% growth in two days, more than doubled the European index indicated. For any ISIS supporter hoping to observe economic chaos that they thought would ensue, those hopes were obliterated by Central European investors who supported their country with the bullish sentiment. These numbers directly contrast the effects of the 9/11 terrorist attacks in the United States which caused a panicky trading atmosphere that induced a minor recession coming out of the tech boom. Although most of the gains have been blamed on proposals for new stimulus from the ECB and Draghi, I can't help but claim that there is a greater cause in the trading today, and ironically, it would make more sense and less be less irrational than trading around terrorism usually is. Looking at 9/11 investing sentiment particularly, the horde of buyers and sellers erratically projected a future of chaos because of one major terrorist attack in New York. Any economist or financial analyst would agree that group psychology overcame fundamental valuations when traders systematically undervalued stocks irrationally. But that is the overall goal of terrorism, to incite paranoia in every branch of a particular society. Today, if anything, rational behavior overrode panic as economic chaos was set aside for a "business as usual" approach. On the other hand, many investors believe that the ECB will respond to solidarity with easier policy. Something that Draghi should be wary of doing, especially with higher probabilities of Fed rate hikes which could create an unstable global marketplace.

Stocks and indices are indeed predicting something other than "business as usual" as military campaigns are accelerated because of the attacks. Shares of energy firms and some energy commodities are experiencing bullish undertones as ISIS policy talk pervades the necessary media coverage of political events such as G20, NATO conversations, and internal agenda discussions in the U.S. the leading member of a global coalition against the Islamic State. As discussed in my previous article, airstrikes against key oil outposts of ISIS were deployed on Monday with hopes of choking financial streams fueling the terrorist network. These attacks changed the resistance's course from "containment" to "destruction." With that, investors must begin to consider, and adopt into their subsequent trading strategies, the possibility of a more aggressive plan in Iraq and Syria with discussions of a ground force presence put on the table by French officials and a few other Western leaders outside of France. Just like the Fed futures contract's movement with the prediction of rate hikes, oil and gas firms and energy commodities react to the increased probability of a reduction in petroleum supply during periods of conflict in the Middle East.

Provided by FactSet

As one can observe in the graph above, the 9/11 terrorist attacks had short-term bullish implications for WTI price and oil and gas companies. Here, we can see BP, Exxon-Mobil, and the WTI benchmark outperform the S&P 500 coming out of the attacks as panic reached not only New York but the markets as well. A month later, XOM and BP had both rebounded and gained more percentage points than the S&P 500 with gains in the coming months as ground force involvement was discussed. WTI price fell in that same month but would late gain in the intermediate term as OPEC fanned the flames of supply endangerment. Even though the Paris attacks evoked different sentiment surrounding general stock performance, I do think that there are some bullish upsides to energy shares, appearing similarly to 9/11 short-term trading trends, as more aggressive ISIS tactics are introduced into the debate. Just after the attacks, shares of BP and Exxon are up 3.85% and 2.38% respectively while WTI gains amounted to 2.45% on Monday (with pared losses today). The energy sector outperformed the major market average, but don't count on those increases to be sustained unless the discussions of accelerated aggression elicit some tangible change.